Month: September 2008

International Crude oil prices have corrected 26% from their July 3 highs on fears of slowing global growth leading to demand destruction.

Subsidies on petrol and diesel are down to Rs2.9/ltr and Rs8.1/ltr, respectively, down from a high of Rs14/ltr and Rs25/ltr. LPG and SKO losses are down 22-25% to Rs262/cylinder and Rs27/ltr. Overall subsidy losses are down 52% from peak level in May-08 to ~Rs91B

If crude stays at US$105-110/bbl for the rest of FY09, annual under-recoveries will come down to Rs1.55-1.60 trillion from over Rs2.0 trillion estimated in early-Jun08, when price hikes and duty cuts were announced. This exactly takes care of Rs400bn unaccounted gap between the Finmin’s bonds allocation vs. Petroleum Ministry’s wish

The rising curve of Inflation for now is moving sideways. For the week ending 23 Aug ’08, headline (wholesale price index, WPI) inflation was 12.34%, in line with market expectations.The decline in the inflation rate this week has been due to w-o-w softening of primary, in particular, vegetable prices. Egg, meat and cereal prices also declined. Within manufactured products, edible oil prices fell.

With inflation softening over the past two weeks and the change of guard at the RBI, expectations have been raised that a rate cut could come soon. However, we do not think so. In over view the RBI should maintain its policy stance until inflation corrects significantly and remains low for a while.

The appointment of Dr. Subbarao as the new RBI Governor has seen as a Political move by Foreign Financial Institutions effectively designed to put a halt to the progressive monetary tightening that Governor Reddy has implemented since he took the job in September 2003.

On 28 July, Dr. Subbarao spoke to Bloomberg and quoted that raising rates is the “obvious” answer to surging prices. So we can expect interest rate calls unchanged, envisaging 50bps of repo rate hikes and 50-75bps on the CRR by end CY2008. The rate reductions will only begin in 2H CY2009 when growth may have slipped below 7%.

A period of below trend growth, which the monetary tightening may well engineer, is likely to be deemed as an inevitable consequence of controlling inflation expectations and easing the many bottlenecks in the economy.

We have reliably learnt that HCL technologies is preparing a counter bid to Infosys’ bid for Axon. We had covered the implications of Axon takeover by Infosys on the 26th of August and had clarly stated at the end that a counter bid is not ruled out.

Our due dilligence indicates that HCL Technologies has $100 mn in cash and maybe upto $500 mn including short term investments. HCL has appointed Merill to help it counter bid and arrange for part financing the deal.

HCL Technologies is not present in the SAP domain and the acqusition will complement its existing vericals and strengthen is base in Europe. HCL already is one of the best local employers in the European union and may not face any hurdles while obtaing the clearance if it wins the bid.